The effect of audit firm size on prizes is a complex function of competition in the market for audit services, product differentiation, and scale economics to large firms. In this study, a competitive market is supported in Australia with product differentiation to Bif Eight accounting firms. Specially, Big Eight accounting firms have significantly higher audit prices than non-Big Eight firms. This results holds for ‘large’ and ‘small’ auditees. A test is also made of price cutting in the Australian market. Price cutting is defined as lower initial audit fees than continuing engagement fees for a comparable audit. Test results do not evidence price-cutting behavior by accounting firms. There is in fact weak evidence that initial audit fees are higher than continuing engagement fee levels. Higher initial fees suggest that accounting firms may recover at least some of the audit start-up costs immediately.

Ruddock, Taylor, and Taylor (2006) use an earnings conservatism framework to investigate the effects of nonaudit services (NAS) on earnings conservatism, and to test whether audit quality was impaired by NAS in Australia during the 1990s. They find no evidence of differential conservatism conditional on the level of NAS fees paid to auditors, and thus conclude that NAS have no adverse effect on audit quality. While this result may not extrapolate to the U.S. setting due to institutional difference between the two countries, the study does add to a growing body of empirical evidence that questions whether there is any logical rationale for restricting the scope of the services that auditors provide to their audit clients. In reviewing the NAS research literature over the past 40 years, one has to conclude that there is no “smoking gun” evidence linking the provision of nonaudit services with audit failures. However, the literature also finds that NAS can adversely affect the appearance of auditor independence, and this may be more than a “mere perception” problem, because there is also evidence that stock prices are significantly lower for companies that pay their auditors large fees for nonaudit services.

Large clients create an economic dependence that may cause auditors to compromise their independence and report favorably to retain valuable clients. Economic dependence is measured as a client's size relative to the size of the office that contracts for the audit and issues the audit report. We find no evidence economic dependence causes Big Five auditors to report more favorably for larger clients in their offices. However, larger clients also pose greater litigation risk, and we do find that Big 5 auditors report more conservatively for larger clients, suggesting that reputation protection dominates auditor behavior.

Several hypotheses concerning pension funding strategy are tested in a cross-sectional regression model on a sample of 255 firms. Results are consistent with the following explanations: (1) finance incentives (tax benefits and financial slack) for high-level funding, (2) labor incentives for low-level funding, and (3) financial statement incentives relating to political costs for high-level funding and debt contracting costs for low-level funding. Pension funding strategy appears to be complex, involving tradeoffs between funding incentives. The nature of these interactions and tradeoffs remains to be clarified through future research.